Updated
Unadjusted EBITDA = net income + interest expense + income tax expense + depreciation + amortization
Illustrative SDE = EBITDA + one working owner’s expensed compensation and benefits + accepted discretionary or nonrecurring adjustments
Normalized EBITDA from SDE = SDE − market replacement compensation − adjustments not accepted on the EBITDA basis
Examples use made-up numbers. Education only, not tax, legal or investment advice.
Example
The setup
Example company: Ridgeline Builders Co. (fictional).
Illustrative example.
Independent fictional Ridgeline valuation scenario, NOT the existing annual ledger: net income after $90,000 owner compensation is $80,000; interest $10,000, entity income tax $0, depreciation $15,000, amortization $5,000.
The math
EBITDA = $110,000.
What it tells you
Adding that one owner’s $90,000 and $10,000 documented accepted nonrecurring costs gives illustrative SDE $210,000.
Subtract $100,000 replacement pay to obtain $110,000 normalized EBITDA if the same $10,000 adjustment is accepted.
Raw EBITDA and normalized EBITDA happen to match here; their adjustment bridges differ.
Never add back the same cost twice.
Your next step
What would change your next decision after you check this against your own records?
Educational content, not tax, legal, accounting or investment advice.
Questions owners ask
Can I use the same multiple for SDE and EBITDA?
No. Match the multiple and comparable transactions to the same earnings definition, normalization policy and business context. A multiple is not a guaranteed sale price.
Can I add back all owner compensation?
A one-owner SDE convention may add back compensation already expensed for that working owner. EBITDA normalization must retain a realistic cost for necessary replacement management; drawings were never payroll expense to add back.
Are SDE and EBITDA cash available for debt payments?
No. Both can omit capital spending, working-capital changes, debt principal and taxes. Review a cash-flow forecast and documented adjustments separately.